June 22, 2010

Some fallacies never die

My previous post on the comparative merits of import substitution (ISI) and the Washington Consensus (WC) has resuscitated some counter-arguments that I thought had long been laid to rest. Three in particular:

1. “ISI was responsible for the debt crisis of the 1980s.” This confuses micro and macroeconomics. The debt crisis was the result of a macroeconomic imbalance: an excess of aggregate spending over aggregate incomes. The relative price “distortions” that were the hallmark of ISI do not necessarily produce macroeconomic imbalances (cf. India throughout the heyday of its ISI regime); nor do macroeconomic imbalances require relative price distortions (cf. Greece today).

2. “Latin American countries did not try hard enough to implement WC policies in the 1990s.” This is probably the most disingenuous comment of all. It does great injustice to the efforts of Latin American policy makers, who led a real revolution in policy making. It is also disturbingly reminiscent of the old chestnut about “communism didn’t fail because it was never tried.”

3. “The check is in the mail.” In other words, just give it more time and we will see the positive results of the WC eventually. The obvious riposte to this is to point to the experience of Asian countries that seem to get quick results from unorthodox but well-targeted reforms. Isn’t it obvious that this experience should be a better guide to growth-promoting policies than the WC?

I have written about all these things in various places. See here and here.

Comments

I agree with you completely, but i think that if you keep an ISI strategy long enough the whole capital structure may be distorted, and you would need a recovery/reallocation period that is not necessarily a growth period. Sorry for my ingnorance. Bye

In practical terms, the only problem with IS is that all products were bad and expensive. I used to work in plumbing and building finishings during the early 80s. I remember that the label "made in Mexico" came to be the same as "low quality", something that is no longer the case.
People went to great lengts to buy stuff on the black market of imported pipes, bathroom stuff, TV, clothes. just everything.

TVs were particularly bad. we hat 3 made in Mexico B&W TVs. their lifetime was around 4 months, after which you had to pay repairs, which made then last another 2 months, then 1 month, and so on. We then bought an american TV on the black market. It lasted 12 years.

I don´t know if economists discount quality from GDP. At least in the case of the TVs we were getting very little in exchange for our money.

I reckon what you have done here is concoct the fiction of an improbable duel between mismatched straw men with severe wind distortion.

#1 -- Your original post did indeed omit the crucial fact that the culmination of ISI was economic crisis, the crisis that gave rise to neoliberal policy, namely Washington Consensus. In fact the single overriding reason for WC was the need to correct the crisis caused by activist ISI.

WC was a technical-corrective response to ISI decay, like doctor and patient. It was not some free-floating ideological innovation.

In fact there is no confusion at all. ISI produced BOTH price distortions and macro imbalances in Latin America and East Asia because countries in those regions ran up massive public debts and private debts to finance losses on ISI and to compensate for lack of competitiveness (e.g. due to price distortion) in ISI sectors.

#2 -- Yes WC tried hard, but also largely succeeded in its limited aim of post-crisis stabilization. Contrary to your implication, its longer run failure was rather a misunderstanding of, or shortfall in, the institutional component of structural adjustment. This failure of WC follow-through on institutional reform was the source of its non-sustainability and the subsequent *political* crises of neoliberalism.

#3 -- Actually the Asian growth successes were/are inherently unsustainable for the same institutional imperatives that caused British and USA proto-activism in the nineteenth century to be tempered and replaced (discontinuously) by liberalism in the twentieth century. Asian liberalism is the twenty-first century task.

My argument is that there is a one-size-fits-all development model called 'capitalism'. The recipes for pasta are essentially all the same, all that differs is the sauce on top.

Counter-arguments against your neoactivist counterrevolution against the neoliberal counterrevolution are set out clearly in my book published last year --- called Capitalism, Institutions, and Economic Development --- which includes a chapter on the relevant Latin American story and comments on your book.

Actually between 2003 and 2006 I tried to get your publisher Princeton interested in my book about the universal recipe of capitalism, to no avail.

Professor Rodrik:
This is a fascinating topic. I am confused about your comment on the Greek crisis and would like some clarification, as I teach an IPE class and recently made a comment to my class that price distortions likely had an effect on macroeconomic imbalances in Greece, which you claim was not the case. Can you elaborate on why this was not the case, or point me to some papers that would support this argument.
Thanks a lot,
Rhonda

Dani,
the reason IS was abandoned in Latin America is that it was by any measure a total disaster and was repelled by societies from Patagonia to Rio Grande as soon as those countries democratized.

There is no coincidence that Latin America had so much inequality at the peak of IS and managed to reduce it with WC policies.

It is also very disingenuous to pretend that growth under cheap oil, with a light social net and repressed labor and from a lower initial GDP is the same as growing from the middle income trap and under post-1973 conditions.That era is over and will never come back.

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Fallacies are arguments that may sound logical, but are not. When you look at some of the examples below, you may see some with conclusions you agree with and some you don't. But the truth, in the empirical sense, is not what is at issue: What these examples are all about is logical argument. All these examples are illogical and based in fallacious thinking.

This is a fascinating topic. My argument is that there is a one-size-fits-all development model called 'capitalism'. The recipes for pasta are essentially all the same, all that differs is the sauce on top.

Regarding the cause of the 1980s debt crisis:
The most obvious cause to my mind was Paul Volker's disastrous experiment with monetarism. This sent US interest rates to 20%.
That led to a massive rise in Third World debt servicing costs and the need to take on even further debt. I think James Galbraith has done some good work on this.

For this matter, once I discussed with one of my friends, not only about the content you talked about, but also to how to improve and develop, but no results. So I am deeply moved by what you said today.

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